Washington Tax-writers Try to Move Forward, Eye Loopholes

Democratic and Republican tax writers in the U.S. Senate within weeks will begin circulating concrete ideas for revamping the U.S. tax code to try to kick-start legislation for this year, a Senate Democratic committee aide said on Tuesday.

The preliminary attempt will focus on hot topics such as curbing tax "loopholes" and potential tax changes for small businesses, said Senate Finance Committee spokesman Sean Neary.

The politics of tax reform make consensus a heavy lift, backers and skeptics both say. The tax code has not been thoroughly overhauled since 1986.

With most Democrats and Republicans squabbling over automatic spending cuts and other budget matters, a small band of lawmakers is swimming against the tide in seeking big changes this year.

The goal is to have proposals "to be pushed out once the political window opens," said Chris Krueger, an analyst for investors at Guggenheim Securities.

A panel in the U.S. House of Representatives is working on a parallel track.

Dave Camp, the chairman of the tax-writing Ways and Means Committee in the U.S. House of Representatives, is expected to lay out on Wednesday a draft of potential changes to small business taxation, one of his aides said.

Both parties decry tax loopholes, although they diverge on what constitutes one. Democrats typically point to breaks for oil companies and private equity managers, while Republicans talk about a broad tax code overhaul and are less likely to get specific.

More popular tax breaks run the gamut from mortgage interest to charitable donations.

The New Year's Day deal averting the so-called "fiscal cliff" of tax increases and spending cuts extended some controversial tax breaks, including a subsidy that benefits big rum makers and one that helps NASCAR racetrack owners.

A political window could open when the government runs out of its borrowing authority and hits the "debt ceiling" in May, a deadline that could force lawmakers to act, some analysts and aides say.

In January, lawmakers voted to extend the so-called "debt ceiling" to May 19, as Republicans gave in on a key concession of demanding new taxes.

The U.S. Treasury can then use accounting maneuvers that will allow the government to continue borrowing funds. But that is temporary and Republicans say they will demand spending cuts to raise the borrowing limit again.

Staff to Senate Finance Committee Chairman Max Baucus and the panel's top Republican, Orrin Hatch, are working in a rare bipartisan fashion to produce the tax reform papers, Neary said.

BIG CHALLENGES

The parties are far apart on basics such as whether a revamp should raise revenue and whether money gained from capping loopholes should fund lower rates, or be used to cut the deficit.

A senior Republican Senate leadership aide was skeptical Democrats and Republicans would be able to resolve their differences.

It is a delicate political balance for Democrat Baucus, who is up for re-election in 2014 and hails from Montana, a Republican-dominated state.

Baucus and Camp, a Republican meet weekly to update each other on progress, another rare bipartisan effort.

Aides on both sides acknowledge that leaders in both chambers have not fully embraced tax reform as a top priority.

Camp recently set up committee "working groups" on topics ranging from financial products to real estate taxation to generate ideas in the event a deal emerges.

Since the groups were established, lobbying activity has increased significantly, according to lawmakers and aides.

"We want to be cognizant of the fact that these debt limit discussions, or any of these (budget) discussions can turn in a heartbeat and be a vehicle" for tax reform legislation, the Republican aide said.

Democratic and Republican tax writers in the U.S. Senate within weeks will begin circulating concrete ideas for revamping the U.S. tax code to try to kick-start legislation for this year, a Senate Democratic committee aide said on Tuesday.